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What exactly is DeFi, which is called "will subvert existing finance", and what advantages does it have? (on)



Editor's Note: The emergence of smart contracts has provided an important necessary condition for the development of the blockchain, and since then the blockchain world has had a wealth of applications. DeFi is an important part of blockchain applications that cannot be ignored. Many large institutions and outstanding investors have never stopped discussing DeFi. ING Bank has been analyzing and researching the risks and opportunities faced by the DeFi space, hoping to optimize its system application and give an application model. Not long ago, ING Bank wrote a book entitled "Lessons Learned from Decentralized Finance", and proposed that "if traditional finance and decentralized financial services can be combined, better financial service methods will be produced. "The key conclusion. In this in-depth report, the mysteries behind the current DeFi are dismantled in a relatively clear and simple way, and the definition, attributes, classic use cases and experiences that can be obtained from DeFi are shared. The following is the compiled content-zce of the Chain Market team for your understanding and study, and I hope it can inspire you. Because the paper is long, we will push it three times, please enjoy the following: Abstract Globally, blockchain and distributed ledger technology are used to transform existing traditional financial services, while centralized and decentralized financial services The so-called gap between may lead us to bias its services. In this white paper, we analyze the characteristics of DeFi and provide lessons for centralized and decentralized financial services. Based on our analysis and lessons learned, we conclude that if centralized and decentralized financial services cooperate, the best of both services can be achieved. Introduction Since its inception in 2017, decentralized financial applications (DeFi) have taken the world by storm. DeFi can be defined as the transformation of traditional financial products into products without intermediaries through smart contracts on the blockchain. In principle, any existing traditional financial service can be transferred to a similar decentralized financial service. There seems to be a split between traditional finance and DeFi, traditional finance is considered centralized because there are intermediaries managing the books, and DeFi is considered decentralized because its financial services have no intermediaries. This obvious difference is explained by gray literature (Editor's note: not controlled by profit-making publishers, but published by governments at all levels, scientific research institutes, academic institutions, business circles, etc. Fueling further fuel are popular headlines in various hard-to-get print and electronic literature, such as suggesting that DeFi could replace traditional banks. In this white paper, we analyze whether there is a split between traditional and decentralized financial services. Messari Researcher: Most innovations in the encryption field will eventually be called "finance": Messari researcher Jack Purdy tweeted that most innovations in the encryption field will eventually be called "finance". [2021/6/18 23:45:54] To this end, we first discussed the current views on DeFi in Section 2. Then, in Section 3, we analyze and discuss 10 common properties of DeFi. In our view, these attributes may be a double-edged sword. On the one hand, these properties allow the improvement of existing processes and even the introduction of new financial services; on the other hand, these properties may have serious consequences for the entire DeFi system on a global scale. To further clarify these features, we describe and analyze a DeFi use case in Section 4. In Section 5, we propose 15 lessons for central institutions as well as the DeFi community. Finally, in Section 6, we argue that the goal of DeFi is to improve current traditional financial processes. While it has certainly improved, financial services in DeFi are not without risks or drawbacks. In fact, here, financial services with central institutions can support DeFi to share experience and advantages in specific services, such as KYC supervision. In the end, we concluded that traditional financial services and DeFi should collaborate, combining the best of both worlds to create global financial services. Editor's note: Considering the readability, we divide the full text into three articles, upper, middle and lower, so that everyone can read and understand better, and this article is the first of this report. The literature contains various views on what is DeFi, such as a paradigm or a financial model, and various definitions of DeFi can be found. In this section, we will discuss these views and definitions of DeFi. DeFi is a paradigm. A paradigm can be seen as an example, traditional finance is a paradigm of a financial system characterized by a ledger managed by a central authority. DeFi is another paradigm of the financial system, which is characterized by decentralization and a ledger managed by multiple parties. DeFi as a financial model. DeFi is a financial model that provides financial services. For example, Brown and Oates explore the design of different levels of government in assisting the poor, and they discuss both centralized and decentralized approaches ("decentralized finance and administration") to help the poor. There are many definitions of DeFi. For example, Meegan defines DeFi as "...the transformation of traditional financial products into products without intermediaries through smart contracts on the blockchain." Another definition was proposed by Gudegeon et al., who believe that DeFi is a "peer-to-peer financial system that utilizes smart contracts based on distributed ledgers to ensure its integrity and security." Xu Yiji, founder of Nebulas: Polkadot cannot yet be called the third-generation public chain: Jinse Finance live report, 2020 Cointelegraph Chinese Greater Bay Area·International Blockchain Week was held in Shenzhen on August 6. Xu Yiji, founder of Nebulas, said at the roundtable forum on "Technical Evolution of the Third Generation Public Chain" that the goal of every public chain is to be a third generation public chain. The first-generation public chain is Bitcoin, and the second-generation public chain is a competing public chain led by Ethereum. However, the concept of the third-generation public chain is vague, and the sign is Filecoin. The public chain carrying decentralized data may become The third generation public chain. Polkadot is only responsible for the link, and it cannot be called the third-generation public chain. [2020/8/6] Both definitions regard smart contracts as a key component of DeFi. However, Meegan focuses on the transformation process of traditional financial products, while Gudegeon et al. focus on which attributes (integrity and security) are achieved. Popescu defines DeFi as "an ecosystem of financial applications being developed on top of blockchain and distributed ledger technology (DLT)." Here Popescu's definition includes both blockchain and distributed ledger technology, while Meegan only considers blockchain, and Gudegeon and others only consider distributed ledger technology. However, Popescu's definition of DeFi does not include smart contracts. Samani makes a clear distinction on what types of blockchains DeFi deploys in the following definition. "DeFi executes financial contracts through code running on censorship-resistant and permissionless public blockchains". According to Samani's definition, it does not include account books with public authority restrictions and account books with private authority restrictions. In contrast, Popescu and Gudegeon et al include DLT in their definition of DeFi. Musan believes that "DeFi is DApps, which can realize interoperable proto-cols, which are specially used to utilize and trade ERC-20 tokens." DApp is a combination of a smart contract and some form of user interface such as a website. Musan expanded on the definitions provided by Meegan and Gudegeon et al., noting that DeFi requires a user interface. The definitions summarizing the above discussion include: What is DeFi? (For example, an ecosystem for financial applications) What components are used in DeFi? (such as smart contracts) to achieve which properties? (eg integrity, security) How are these properties achieved? (Using DLT, through blockchain) Voice | Dr. Doom: BTC cannot be called a cryptocurrency: According to CNBC, at the SALT 2019 conference in Las Vegas on Wednesday, Dr. Doom (Nouriel Roubini) and Galaxy Digital founders Michael Novogratz debates Bitcoin and cryptocurrencies. According to Dr. Doom, cryptocurrencies are the parent of all bubbles. Bitcoin etc. cannot be called a cryptocurrency, the word cryptocurrency is a total misnomer. To be a currency, it must be a unit of account, valuable and scalable means of payment. Bitcoin does not scale efficiently and can only do seven transactions per second, whereas a credit card can handle thousands of transactions simultaneously. Bitcoin is too volatile to be a stable store of value and is vulnerable to fraud. He stated that he has never seen such a level of manipulation, so these are not currencies. Novogratz said that the price of Bitcoin rebounded after the fall in 2018, and it is still widely accepted and concerned, and a lot of changes are happening in reality. In some ways, it's a small miracle. The debate is over, Bitcoin has won. People all over the world now consider Bitcoin a legitimate place to store their wealth. Businesses such as Fidelity and Facebook are implementing or considering cryptocurrencies. So this is Bitcoin, with a very healthy future, it will continue to go higher. [2019/5/9] Obviously, there is no consensus on the definition of DeFi. We aim to separate these issues and provide a broader definition based on the question "What is DeFi?" In this white paper, we use the following definitions. DeFi is financial services that operate on public permissionless blockchains. Currently, such financial services mostly consist of the following. Banking services that convert currencies (such as issuing stablecoins) Provide peer-to-peer (or pooled) lending platforms Enable advanced financial tools such as decentralized exchanges (DEX), tokenization platforms, derivatives and prediction markets Decentralized finance Attributes DeFi attributes are mentioned as promises, opportunities, and principles. Based on our literature research, we have identified the following ten DeFi attributes. In the following, we discuss each attribute. Composability It can be said that composability is a decisive attribute of DeFi. Gudgeon et al define composability as "the ability to build a complex, multi-component financial system on top of a cryptoasset". A common metaphor in DeFi is "crypto Lego", the main idea being that the community benefits from individual advancement. Head of the National Bank of Romania: Digital currency can hardly be called a means of exchange: According to business review news, Mugur Isarescu, head of the National Bank of Romania (BNR), said that digital currency can hardly be called a means of exchange because retailers who accept Bitcoin The volume is insignificant and the transaction volume is small. But at the same time, he suggested that the technology behind digital currency must be explored, emphasizing that the National Bank cannot ignore the development of digital currency. [2018/6/15] Composability is the property of a system, that is, the various components of the system can be easily connected. Here, blockchain provides a foundation upon which financial services can be built. Following the above metaphor, a blockchain can be viewed as a warehouse, the “Lego” components of which are financial services. The benefit of composability is that components can be easily connected, unlike siled and centralized payment systems. Components are public and can be reused to create new financial services. However, a major downside of composability is the creation of an intertwined debt system, which has the potential to lead to a financial crisis, similar to the 2008 financial crisis, and it is unclear how DeFi will manage the potential impact of this composability . Flexibility Many authors have mentioned flexibility as a property of DeFi, although none of these authors have defined what exactly flexibility in DeFi is. Flexibility can be defined as the ability to be easily modified, and we discussed the flexibility of DeFi from the perspective of software and lack of regulation. DeFi is built on open source code, which makes software (such as smart contracts) flexible because it can be used by anyone, and it can be copied and adjusted by anyone. Continuing the composable property Using Lego as a metaphor, Lego bricks can also be modified in size, color and shape. In addition, DeFi is flexible because of the lack of regulation, which allows the creation and use of services without any restrictions in principle. However, it is clear that the lack of supervision of DeFi also has its disadvantages, because it can easily be used for fraudulent activities. Decentralization The DeFi literature mentions that decentralization is an adjective for the following nouns: validation, network, exchange, business model, governance, and application. However, in most cases, the literature does not further define decentralization. Bitcoin Cash is said to be three times as big as Bitcoin Gold: data shows that about 6.6 million BCH have been issued so far, compared to only 2.2 million BTG. There is still time for more Bitcoin Gold to be discovered, but so far, most holders have been blocked. Reasons include the low value of BTG compared to BTC, and the perceived risk of splitting Bitcoin through third-party tools to claim forked coins. [2017/12/9] In the context of DeFi, decentralization can be described as a convenient way to provide financial services without a trusted intermediary. Catalini and Gans believe that DeFi services do not have a centralized intermediary. They also argue that decentralization can be thought of as digital information validity verification, settlement, and agreement without a central party. However, it is still unclear what constitutes a centralized intermediary, for example, it may be a single entity, but it may also be a limited set of multiple entities. Popescu also does not further define who is a trusted intermediary (single entity, multiple entities), nor does it define which party trusts this entity. However, Catalini and Gans argue that trust is transferred from a central party to code and consensus rules. This shows that despite the absence of a central party, trust is still required. In fact, Ethereum users firmly believe that the 8 miners will not cooperate, because this will cause these mines to monopolize the Ethereum network. Clearly, there is no consensus on what decentralization is, nor what term decentralization applies to in the DeFi literature. In this white paper, we consider decentralization to refer to technologies that provide financial services on the basis of DLT, including blockchain. Here, decentralization refers to multiple parties proposing, verifying, and reaching consensus on ledger updates.


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